Discount Chains Go Under as Consumers Keep Cutting Back

What happens when consumers grow too cash-strapped for discount stores?

In some cases, the stores go under. 

As Bloomberg News reported Sunday (May 26), the economic pressures on lower and middle-income Americans have begun to impact the retailers that cater to them.

For example, fashion retailer Rue21, whose customers have an average annual household income of around $50,000, filed for bankruptcy protection for the third time earlier this month and will close all of its 540 stores. 

The company had said its shoppers “struggled significantly to cope with quickly rising inflation” and pulled back their discretionary spending.

The report also uses the example of another chain that targeted bargain-hunting shoppers — 99 Cents Only Stores — which last month also began liquidating its stores, mostly of which are in the American Southwest.

“This was an extremely difficult decision and is not the outcome we expected or hoped to achieve,” interim CEO Mike Simoncic said at the time.

“Unfortunately, the last several years have presented significant and lasting challenges in the retail environment, including the unprecedented impact of the COVID-19 pandemic, shifting consumer demand, rising levels of shrink, persistent inflationary pressures and other macroeconomic headwinds, all of which have greatly hindered the company’s ability to operate.”

James Knightley, chief international economist at ING, told Bloomberg that the impact of belt-tightening among lower-income consumers has been alleviated somewhat by heavier spending by wealthier Americans.

He says that the top 20% of consumers spend as much as the bottom 60%. Still, troubles are adding up for businesses serving the lower income group.

“The bottom 60% of households are increasingly feeling more and more stress,” Knightley said. “Discretionary spending is really starting to be cut.”

Meanwhile, PYMNTS wrote last week that consumers across income brackets are being more careful with their discretionary spending, with many cutting down on nonessential purchases in response to ongoing inflation. It’s a pullback being noticed by retailers.

Macy’s Chairman and CEO Tony Spring noted on the company’s latest earnings call that the retailer’s shoppers continue to feel financial pressure, prompting them to “carefully scrutinize their discretionary purchases.”

And even high earners aren’t immune to this trend.

“We’re certainly seeing at the high end, the Bloomingdale’s consumer is interested in purchasing, but she’s being very thoughtful in the category she’s purchasing in,” Spring said, adding that luxury handbag and shoe sales have been softer, but high-income shoppers are still spending on advance contemporary products, beauty items and home goods.

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